What Is DuPont’s Opportunity In The Commercial Biofuel Market?

US chemicals giant DuPont (NYSE:DD) recently announced that it has made progress in the construction of a refinery in Iowa which will utilize corn waste to produce ethanol-based biofuel. [1] Other companies which were pursuing similar projects, notably BP and Coskata, have backed out for the time being, and this could create an opportunity for DuPont to license and commercialize what could be a major fuel source in the future if proven commercially viable. Here we address a few key questions related to the topic of biofuels and DuPont’s current position in the industry.

DuPont recently announced that it has broken ground on its cellulosic ethanol facility in Nevada, Iowa. The plant is expected to complete by mid-2014 and will have an annual output of 30 million gallons of the biofuel. The facility will require capital investment of around $7 per gallon, translating to a total investment of over $200 million.

What is the long-term outlook for biofuels?

Biofuels has been a polarizing topic ever since its inception decades ago. On one hand, they were thought of as an good, long-term solution to global fossil fuel dependence. Another school of thought views the industry as one which does far more harm than good in terms of higher emissions compared to fossil fuels they are intended to replace and other negative effects such as food price inflation and deforestation.

In reality, the effects of biofuels, whether positive or negative, depend heavily on the plant from which they are extracted. Corn based biofuels, which DuPont plans to produce, still remain controversial in this regard. However, the company’s belief is that its longstanding biofuels division, in collaboration with its crop production expertise, can make the fuel economically viable and ensure minimal negative externalities.

How much revenue can DuPont generate from this?

We believe that DuPont is well-positioned to pioneer the commercialization of cellulosic ethanol-based biofuels. The company’s recent acquisition of Danisco further bolsters its capabilities in the domain.

DuPont’s industrial bio-sciences division is a relatively new division formed in 2010. The division has however been scaling up at a rapid rate, and we believe the company can support the division’s projects with the large cash inflow from the recent sale of its performance coatings division.

The industrial bio-sciences division currently makes up around 2% of the company’s value as per our estimates. The global market for biofuels and biomaterials is currently valued at over $75 billion. The division had revenues of around $700 million last year, which translates to a share of less than 1% of this market opportunity. Going forward, we forecast a gradual increase in its share of the industry’s revenues. We note that there might be significant upside to our estimates, particularly if the company is able to gain a foothold in the market for ethanol-based biofuels with this project.

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